New study sees two regional trade blocs emerging—one Euro-centric, the other Russia-centric

Most countries in Eastern Europe and the Former Soviet Union are benefiting from their reintegration into the world trading system, but to take full advantage of greater liberalization, they must push ahead more strongly on domestic reforms, according to a new World Bank study.

The study warns that without such reforms, two trading blocs will continue to emerge: one faster-reforming, richer group of countries with ties to Western Europe, and a second, slower-reforming, poorer group focused on Russia.

From Disintegration to Reintegration: Eastern Europe and the Former Soviet Union in International Trade analyzes the evolution of trade in 27 transition countries since the fall of Communism. It finds that most of the region’s countries are better integrated into the global economy today than at any time since the Russian Revolution. Over the past 10 years, exports have tripled, imports have increased two and one-half times, and trade has grown at a faster pace than any other region worldwide.

Priority policy reforms for Albania and other countries in the region are highlighted in the study. Among the reforms recommended for Albania is to further open up its services sectors. Given that 52% of the country’s exports are concentrated in the services sector, it is especially important that the country pursue regulatory reforms and further privatization in these sectors.

The study finds that open trade is a potent driver of development in the region, as elsewhere in the world. However some of the region’s countries have better capitalized on trade than others. The most prosperous ones are finding ways to leverage international integration into faster growth by matching liberalizing trade reforms with complementary ‘behind-the-border’ structural and institutional reforms.

But the region is also comprised of countries at the other end of the spectrum, for example, Belarus and Uzbekistan. Their trade regimes remain relatively closed and they have yet to pursue fundamental ‘behind-the-border’ market reforms: the state still occupies substantial ownership positions in key businesses, services sectors remain closed to competition, and the infrastructure and institutions for trade facilitation are largely undeveloped. Their populations are decidedly poorer.

‘There is an emerging bipolarity in the Region. One group tends toward trade with the advanced countries of Western Europe and enjoys relatively high incomes. The other group is considerably poorer and is tending to pull back towards a Russia-centric sphere. Most of it economies are still dominated by commodity trade, and they risk missing out on participating in the modern international division of labor,’ said Harry Broadman, Economic Adviser and lead author of the study.

However, given the diversity among countries in the region, the boundaries of the two blocs are soft. Russia and Ukraine, for example, are more integrated into the global economy than many of their neighbors in the Russia-centric bloc.

Meanwhile, many of the countries in Southeastern Europe form a ‘middle ground’ between the two poles, according to the study. Though Albania’s trade regime is quite liberal, it still needs to reduce its regulation of the services sector, develop trade-facilitating infrastructure, and encourage foreign direct investment to link domestic firms into global networks.

According to the study, a two-bloc region is not inevitable.

But concrete actions will be necessary to arrest—and potentially reverse—its further development. Categorizing countries into three groups—the new EU member states, Southeastern Europe, and the rest of the former Soviet Union - the study makes specific recommendations for reforms in both trade policy and ‘behind-the-border’ regimes.

‘Virtually all the countries in the Region still need to pursue further trade policy reforms, such as reducing tariffs, lowering disincentives to export, pursuing WTO accession